Tax Authorities are responsible for managing revenue and administering tax law and policy. This generally includes the authority to assess penalties and interest against taxpayers or citizens who are not compliant with the tax law. The most common assessments are late payment penalties, simple or compound interest on past due debt, and failure to file penalties. The tax law and department policy will prescribe how credits and payments are allocated against tax and other types of debts, as well as the calculation basis for assessing penalty and interest. The calculations are quite complex, especially in scenarios where there are partial payments, and the penalty and interest accrues daily or monthly.
Penalty and interest assessments of unpaid taxes can be significant financial amounts. For the integrity of the tax authority and legal system, it is important that these assessments be accurate. It is common for taxpayers to question how tax penalty and interest have been calculated and assessed, especially in complex scenarios. Historically, tax authorities have struggled with how to explain and verify the correct application of tax law and policy for a penalty and interest assessment. Processing systems typically provide the dollar amounts for penalty and interest calculated, but do not provide the details needed to verify that the calculation is correct, that tax law and policy has been correctly applied, and to sufficiently explain to a taxpayer how the amount of the assessment was determined.